The Washington Winds: The 'Death Knell' of DB

June 28, 2006 (PLANSPONSOR.com) - CHICAGO -
Following the political winds in the post-Enron and WorldCom
world that are now focused so strongly on 401(k) plans,
lawmakers currently hashing out a sweeping pension reform
measure may also be marking the beginning of the end of the
defined benefit system.

A panel of long-time observers of the political
scene in Washington, D.C., offered this key conclusion
Wednesday as PLANSPONSOR’s national conference, PLAN
DESIGNS 2006, opened at a Chicago hotel.

What might quicken the DB system’s demise
is the Congressional conference committee’s version
of the pension reform measure and lawmakers’
consideration of the legislation, said attorney Steve
Saxon, a principal with the Washington, DC law firm Groom
Law Group and an Employee Retirement Income Security Act
(ERISA) expert.

Increasing numbers of plan sponsors with DB plans
will follow a steady trend of recent years of freezing
their traditional pensions in favor of an often-beefed up
defined contribution program.

“They’re not going to suffer the
reputational impact they used to,” Saxon asserted.
“Mark my words, the flood gates (of DB plan
freezes) will open. It’s the death knell of the
DB plan. I think it’s a sad day.”

Saxon and other members of a panel discussing the
current Washington scene for pension issues agreed that
the work of the US House-Senate conference committee and
other Capitol Hill pension policy discussions are taking
place against the backdrop of a significant shift away
from the focus of finding long-term solutions for the
traditional pension system. More than ever before,
lawmakers are refocusing on DC alternatives as the
nation’s key vehicle for retirement funding.

“What we have in Washington is crisis
management, but it’s not a national retirement
policy,” Saxon said. “(Lawmakers) never look at
the long term; they just try to solve the immediate
problems.”

“Whether we like it or not, the 401(k) is
becoming the primary retirement vehicle for the American
worker,” Saxon said.

Bridget Flynn, senior director pension tax policy,
Nationwide Office of Federal Relations, told the
PLANSPONSOR conference opening session that lawmakers on
the pension bill conference committee have been focusing
mostly on DB issues and are now expected to turn their
attention to more DC plan proposals.

Among other issues, Flynn said the current version
of the reform bill will include a section on hybrid
plans, which she said will likely offer plan sponsors
prospective but not retrospective relief from lawsuits
over DB plan conversions.

Conferees are also currently finalizing “at
risk funding” rules, Flynn said, which will define
plan funding levels that will designate a plan for
special “at-risk” status. Among other things, at-risk
companies are expected to be barred from increasing
pension benefits until their funding levels are brought
more into line. Finally, she said she thinks the eventual
legislation may finally settle the issue of when plan
sponsors can offer investment advice – an area, as Flynn
pointed out, that is still the subject of sharp
disagreement between the Senate version and the House
version.

Both Flynn and Olena Berg Lacy, a former assistant
Secretary of Labor, predicted an eventual pension bill
would almost certainly deal with the issue of auto
enrollment – a plan design issue that has significantly
gained popularity in recent months as plan sponsors
look for ways to drive up enrollment and deferral
rates.

“This is a very, very popular issue in Washington,”
Flynn said. “No one doesn’t like auto enrollment in
Washington. There is no way auto enrollment is not going
to be in that bill.”

Lacy gave a strong endorsement for auto enrollment,
pointing out that plan sponsors do not have to wait for
the pension reform measure to come out of Congress before
making their move. “People, on the assumption of that
(passage of the pension bill), can start moving down this
path,” Lacy said. “There is a lot of reason to move on
with this. It’s a great idea.”

She pointed out that the Department of Labor (DoL)
is already working on a safe harbor provision for plan
sponsors’ selection of a default investment option into
which auto enrolled employees are typically placed. She
said DoL officials will sanction the selection of
a:

Balanced fund,

Lifecycle fund, or

Managed Account.

Plan sponsors might even be able to get away with
more than one fund choice – if they can justify the move.
“You are going to have to come up with some pretty strong
reasons why that is appropriate for your plan,” Lacy told
the audience.